Nick Hanauer's Near Insane $15 An Hour Minimum Wage Proposal

The stimulus created 2 million jobs in its first year, and 3.2 million by March 2011.

OK, for $800 billion or so we got 3.2 million jobs. For $1 billion we’ll get, presumably, one eight hundredth of that: 4,000 jobs? Recall, the employment numbers come with error bars: as I recall it those error bars being 150,000 either way. We simply don’t measure the economy accurately enough for us to ever know whether a rise in the minimum wage would increase aggregate demand enough to increase employment.

If $1 billion gets us 4,000 jobs then $45 billion will get us 180,000 jobs. And do note, that's before the disemployment effects of the new and higher minimum wage. That's the gross, not the net, effect of our more demand in the economy. Or, to put that in context, around and about the same number of net jobs that the US economy is currently producing each and every month. That's a simply trivial (and please, recall that that's a gross, not net, effect) effect in an economy the size of the US.

Hanauer:

An objection to a significant wage increase is that it would force employers to shed workers. Yet the evidence points the other way: Workers earn more and spend more, increasing demand and helping businesses grow.

Well, let's actually look at that. We've already got an estimate of the number of jobs that would be created. So, what do we know about how many jobs would be lost? The important point is what is the minimum wage as a percentage of the median wage:

The important part here is not what the minimum wage actually is, but what is it as a percentage of average wage? Which brings us to this research. The minimum wage bites, begins to have serious effects upon employment rates, when it is more than 45-50% of the average wage. Below 40%, maybe as high as 45%, it has very little effect essentially because very few people ever get paid less than that 40 ish percent of the average wage.

And we have further evidence here from New Zealand, here from my native UK.

Note that if the minimum wage is having disemployment effects then we would expect those effects to be concentrated among the young and untrained. And we do indeed see very high unemployment rates among the young and untrained where there is a high minimum wage.

Just to point out again the US median wage is $16.71 an hour. Hanauer is proposing a minimum wage of 90% of median wages. This would have, from everything we know, large effects on unemployment. Certainly far larger than the one time creation of 180,000 jobs coming from the effect on the rise in disposable income. So much so that it's very difficult indeed to see that there will in fact be a rise in disposable income. My bet is that there would be more than 180,000 job losses and thus disposable income, on net, would actually fall.

Hanauer:

Raising the earnings of all American workers would provide all businesses with more customers with more to spend. Seeing the economy as Henry Ford did would redirect our country toward a high-growth future that works for all.

We just knew that Henry Ford and his $5 a day story was going to come into this, didn't we? And as ever, here's the truth about that story. It was absolutely nothing at all about creating an American middle class, it wasn't so that Ford's workers could afford to buy Ford's products. It was to reduce the turnover of labour on his assembly line and thus cut his hiring and training costs. And as Paul Krugman points out, that's not something that can be done generally across the economy:

They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist’s reply is, if paying higher wages is such a good idea, why aren’t companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage “compared with other companies” — and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish.

I'm not at all surprised that the AFL-CIO supports this idea. The minimum wage has been, ever since its inception, something that protects union workers at the expense of the non-union ones who lose their jobs. I will admit to being astonished to find that Felix Salmon likes it.

I'll also agree that Nick Hanauer is a much richer man than I am, quite possibly massively more intelligent as well. But the investor Hanauer is, as an economist, a great investor. Raising the minimum wage to $15 an hour is a near insane idea. The effects from job losses would hugely outweigh any possible beneficial effects. If the question were "How can we destroy many jobs?" then a $15 minimum wage would be a great answer. Given that we really don't want to ask that question, let alone implement any policy that brings it about, it's an extremely bad policy.

For the quite simple reason that we know that a minimum wage at more than 50% of median wages is a seriously bad idea. $15 is 90% of the US current median wage of $16.71 an hour. Thus a $15 minimum wage is a seriously bad idea.